Just because you’re over the age of 65 doesn’t mean you need to abandon investing in your RRSP. In fact, depending on the age of your spouse and the type of income you earn, you can continue sheltering money in a registered retirement savings plan, or RRSP, well past the age of 70.
And you might need to, if recent research is correct. One survey from Desjardins Financial Security found that 20 percent of retirees are burning through their retirement savings faster than expected. Another suggests that baby boomers view retirement differently than their parents. In a BMO Financial Group survey of Canadians 45 and over who have at least $25,000 in savings, 87 percent say retirement is no longer a drop-dead date — rather, it’s a gradual shift from full-time work to part-time work and eventually active retirement.
In fact, today’s preretirees will work more as seniors than their counterparts do today. About 58 percent plan to continue working in some capacity after the traditional age of retirement, compared to only 16 percent of current seniors who continue to work. Moreover, 64 percent of retirees carry debt into retirement and 28 percent of those are uncomfortable with that debt.
“Somebody at 65 still has a long investment horizon,” says Bob Jamieson, a certified financial planner at Edward Jones, in Ottawa, so it’s critical they take advantage of the tax-free compounding that takes place in an RRSP. He says Canadians are living longer, which means you may spend almost as much time in retirement as you do in the workforce.
Under government rules, Canadians can contribute to an RRSP provided they have earned income in the year prior to the contribution or have built up unused contribution room. However, earned income means employment income or income from rental properties. Dividend income and interest income don’t qualify for building RRSP room.
As well, you can only contribute to your own RRSP up to the end of the year in which you turn 69. With those rules in mind, there are some strategies to consider.
Eliminate unused contribution room
The first strategy is to eliminate any unused contribution room. According to government figures, Canadians have more than $377 billion in unused contribution room, about $21,000 per person. It’s best to maximize your contributions while you are in your peak earning years, because it generates a greater tax credit.
Jason Vincent, executive vice-president of Fiduciary Trust Company of Canada, the wealth planning division for Franklin Templeton Investments, in Toronto, says one way to do that is through an RRSP catch up loan. “If your cash flow can afford it, then yes, you should borrow.”
Jamieson says instead of contributing a lump sum each year and getting a tax refund, consider investing small amounts each month, which has less impact on your cash flow. “Then, every year, make a 10-percent bump up to the contribution, which is usually painless.” Do that every year, and after seven years, you’ve doubled your contribution, he says.
When the tax refund comes for those contributions, put that into your RRSP. Each year, that will generate a larger tax refund. Better yet, Jamieson says, don’t loan the government money in the first place. Instead, contact the Canada Revenue Agency and ask to let your employer deduct less income tax, which gives you more take-home pay. Then, put that money in your RRSP.
Make your last contribution count
While you must stop contributing to your own RRSP at 69, you can squeeze in one more RRSP payment that wouldn’t normally come due until your 70th year, says Tina Di Vito, vice-president and managing director of retirement planning at BMO Nesbitt Burns in Toronto. That’s because RRSP contribution room is dependent on the income you earned the prior year. So, if you work when you are 69, you earn RRSP room that doesn’t become available until the following tax year.
Say you turn 69 in 2006 and will earn $40,000 this year. That would entitle you to $7,200 in RRSP contribution in 2007. In December of 2006, make an over-contribution to your RRSP of that amount. You are allowed a $2,000 over-contribution but have to pay a one-per cent penalty per month for on any contribution over that. In this case, your over-contribution is $5,200. You’ll pay a minimal one-month penalty of $52 for years of potential tax-sheltered earnings.
Look at spousal RRSPs
Vincent says it’s still possible to contribute to an RRSP after you turn 70, but you have to have earned income in the past year or have unused contribution room and make your contribution to a spousal plan. So, your spouse has to be younger than you.
Say the husband is 70 and still working, and the wife is 65. Vincent says the husband could continue contributing to his wife’s spousal RRSP for another four years, until the year in which she turns 69, at which point the spousal RRSP must be rolled into a Registered Retirement Income Fund, or RRIF.
Avoid pension claw-back
It is important for seniors to factor in government pension monies when managing their RRSP contributions. Di Vito says one thing to watch for when managing your income is to avoid having Old Age Security, or OAS, payments clawed back, which starts at about $62,000 this year. Jamieson adds if you can defer taking your Canada Pension Plan payments, or CPP, until you are 70, you will get 30 per cent more.
In terms of what to invest your RRSP funds in, that depends on your risk tolerance. One common rule of thumb is that the equity portion of your investments should be equal to the difference between your age and 100 — so if you’re 65, you should have 35 percent of your savings in equities.
“I don’t personally recommend that type of split at all. I tend to think that you do want a significant amount (in equities),” says Jamieson. He favours a 50-50 split. The equity component “should not be aggressive, something producing income — dividend-producing mutual funds or stocks that have some potential for growth.” That helps combat inflation, which, over a long period of time, can cut into your retirement nest egg significantly.